In a column today, Times columnist David Brooks contrasts the auto sector with the financial sector. The column illustrates why the recovery of the financial sector will be less straightforward and more difficult than the recovery of any other industry with a failed business model.
Criticizing a possible bailout of the auto industry, Brooks writes that “[t]his is a different sort of endeavor than the $750 billion bailout” — really likely much more — “of Wall Street. That money was used to save the financial system itself. It was used to save the capital markets on which the process of creative destruction depends. Granting immortality to Detroit’s Big Three does not enhance creative destruction. … It is not about saving a system; there will still be cars made and sold in America. It is about saving politically powerful corporations.”
The problem with the contrast Brooks makes is that the modern financial system is itself broken and should not be “saved” in anything resembling its current form. As can happen with any big industry, it depended on a failed business model until that business model finally collapsed. The financial industry, just like the auto industry, thus should go through a full process of painful creative destruction in order to shrink, reform and recover itself.
There’s a real risk that this process won’t happen to the extent needed. Good banks and insurance companies, now, must compete with bad, government-backed ones. Medium-sized financial firms have an incentive to become too big and too complex, so that they’ll be saved in future crises. And no exit strategy from this pernicious reality appears on the horizon.
What does it mean for New York? The engine of our economy can’t rely on the normal processes of capitalism to correct its mistakes. Detroit saw a similar thing, on a much smaller scale, 30 years ago, with the federal bailout of Chrysler.
(Of course, the rest of the country should worry, too, since a warped financial industry can do much more damage to the real economy than can a warped auto industry, partly because a warped financial industry can’t properly “enhance creative destruction” in the rest of the economy.)
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